Authors: Anna Beatch, Tom Richards, Erin Smith
Directors of a corporation are usually required to call a meeting of shareholders when requisitioned by shareholders. This requirement is subject to several exceptions, one of which is the personal grievance exception (the “Exception”).
The Exception allows directors to decline to call a meeting of shareholders if it “clearly appears” that the motive behind the meeting is to address a personal claim or grievance.
Among other jurisdictions, the Exception exists in the business corporation acts of Canada, British Columbia, Alberta, Saskatchewan, Manitoba and Ontario. A recent ruling out of Ontario found that the Exception can only apply when a personal matter forms the central reason to request a meeting.
In Koh v Ellipsiz Communications Ltd., 2017 ONSC 3083 (“Koh”), the Ontario Superior Court of Justice Divisional Court (the “Court”) considered the Exception as outlined in the Ontario Business Corporations Act (the “OBCA”). The Court limited the application of the Exception, holding that a peripheral personal interest is not sufficient to invoke the Exception. In order for the Exception to apply the personal matter must form the heart of the reason to request a meeting. Additionally, Koh re-affirmed that the burden is on directors to prove the existence of a personal grievance.
Under section 105(1) of the OBCA, shareholders who own at least 5% of the issued voting shares of a corporation may requisition the directors to call a meeting of shareholders for the purpose stated in that requisition. However, section 105(3)(c) of the OBCA allows the directors to refuse to call a meeting of shareholders if it “clearly appears” that the primary purpose of the meeting is to enforce a personal claim or redress a personal grievance against the corporation or its directors, officers or security holders. Section 105(3)(c) constitutes the Exception in Ontario. Almost identical language exists in the business corporation acts of the above-mentioned Canadian jurisdictions.
A central question in Koh was the definition of “personal grievance.”
In Koh, the largest shareholder of a corporation did not approve of a newly elected slate of directors and threatened to requisition a meeting of shareholders if the directors did not resign. When they did not resign, the shareholder formally requisitioned the directors to call a meeting of shareholders for the purpose of removing three directors and electing new directors to replace them. The directors declined to call the meeting on the basis that the primary purpose of the meeting was to redress a personal grievance against the corporation or its directors.
The Court found that one of the primary indicators of a personal grievance is that:
“the subject matter of that grievance bears no real or direct relationship, nor is it otherwise integral, to the business and affairs of the company, or, for that matter, to the griever’s role as a shareholder…while the grievance may bear some connection to the business and affairs of the company, that is not at the heart of the grievance.”
The fact that a shareholder requisitioning a meeting has an “element of personal interest” in the matter is not sufficient. Applying the language of the OBCA, the Court stated that it must be “clearly apparent” that the heart of a grievance is personal.
Complementing this high threshold for establishing a personal grievance, the Court drew from case law that places the onus on directors, not the shareholder, to demonstrate the existence of a personal grievance. This case law also states that “the right to call a special meeting is a substantive one and is not lightly to be interfered with.” Siding with the shareholder, the Court found that the directors did not establish that it clearly appeared that the primary purpose of the shareholder’s requisition was to enforce a personal claim or redress a personal grievance.
As noted above, the section of the OBCA relating to the Exception is nearly identical to its western Canadian equivalents. Given this, Koh has potential ramifications for western Canadian corporations.
In each of these jurisdictions, directors are not required to call a meeting of shareholders if it “clearly appears” that the proposal is submitted by the shareholder primarily for the purpose of enforcing a personal claim or redressing a personal grievance against the corporation or its directors, officers or security holders.
Koh is a very recent decision and as such its influence has yet to be fully determined. However, corporations should be aware of Koh’s potential to limit directors’ right to refuse to call a meeting of shareholders and, by implication, its corresponding entrenchment of shareholders’ right to call a meeting. Directors of a corporation who want to rely on the personal grievance exception should consider discussing the matter with legal counsel to ensure that their actions fall within the newly refined scope of the exception.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.